Challenges With Discharging a Credit Card Debt

by John Csiszar

Charging more than you can afford on a credit card can lead to financial disaster.

When you open a credit card account, you make a legal agreement with the issuer to pay back what you borrow. If you stop making payments, your creditor has the legal right to pursue you for repayment. If you can't pay off your debt, you may view bankruptcy as the only way out. However, depending on your financial situation, you may not qualify to file bankruptcy or to have all your credit card debt discharged.

Chapter 7 Qualification

Chapter 7 bankruptcy is the shortest and easiest way to file bankruptcy. A typical Chapter 7 case lasts only a few months, after which you receive your discharge and are no longer liable for your debts. However, Chapter 7 is not for everyone. To qualify, you usually must have an income below the median level in your state. Using a bankruptcy court formula, you must also demonstrate an inability to pay a significant part of your debts. Even if you do overcome the challenge of qualifying for Chapter 7 bankruptcy, you may end up losing your most valuable assets. States protect Chapter 7 debtor assets only up to certain exemption levels, so you may end up wiping out your credit card debt at the cost of your most expensive possessions.

Chapter 13 Payments

If you don't qualify for Chapter 7 bankruptcy, you may still have another bankruptcy safety net in the form of Chapter 13 bankruptcy. For many debtors, Chapter 13 is actually a better option than Chapter 7, as you can keep all of your assets when you file Chapter 13. However, to get the discharge of your credit card debt, you must make monthly payments to your debtors, often for as long as five years. If you miss a payment, you will again be liable for your debt, including penalties and interest.

Nondischargeable Debts

The challenge to discharging credit card debt can continue even after you file for bankruptcy. Certain types of credit card debt are deemed nondischargeable by the U.S. Bankruptcy Court, meaning you will still owe that debt even if you receive a bankruptcy discharge. Two types of charges in particular are presumed fraudulent by the courts and therefore nondischargeable: cash advances of more than $750 in the 70 days before filing and luxury purchases of more than $500 made in the 90 days before filing. Other charges can be judged nondischargeable if an issuer can prove fraudulent intent, such as making additional charges after meeting with a bankruptcy attorney.

Consequences

If you overcome the challenges to discharging your credit card debt, you will have significant negative financial consequences for years to come. If you receive a Chapter 7 discharge, your credit report will reflect this fact for 10 years. In the case of a Chapter 13 discharge, your credit history is tainted for seven years. During this time, credit can be hard to come by, making the purchase of a home or car difficult.

About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.